Question 1

GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Accepted Answer

A)   Opportunity
B)   Fixed
C)   Incremental 
D)   Erosion 
E)   Sunk F) A) and D)
G) A) and C)

Question 2

Webster's has sales of $798,000 and a profit margin of 6.8 percent. The annual depreciation expense is $82,600. What is the amount of the operating cash flow if the company has no long-term debt?

Accepted Answer

A)   $54,264
B)   −$28,336
C)   $22,160
D)   $136,864
E)   $104,760F) A) and B)
G) A) and C)

Question 3

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Accepted Answer

A)   Storing supplies in the same space currently used for materials storage
B)   Utilizing the basket manager to oversee wreath production
C)   Hiring additional employees to handle the increased workload should the firm accept the wreath project
D)   Researching the market to determine if wreath sales might be profitable before deciding to proceed
E)   Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debtF) B) and D)
G) A) and C)

Question 4

Nelson Mfg. owns a manufacturing facility that is currently sitting idle and is debt-free. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,390,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm received a bid of $1,700,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis?

Accepted Answer

A)    $0
B)   $617,000
C)   $1,083,000
D)   $1,700,000
E)   $1,619,000F) B) and D)
G) A) and E)

Question 5

Hot and Cold has annual sales of $847,000, annual depreciation of $47,000, and net working capital of $43,000. The tax rate is 21 percent and the profit margin is 7.3 percent. The firm has no interest expense. What is the amount of the operating cash flow?

Accepted Answer

A)   $14,831
B)   $108,831
C)   $121,220
D)   $168,480
E)   $155,831F) A) and E)
G) B) and C)

Question 6

A project's cash flow is equal to the project's operating cash flow:

Accepted Answer

A)   plus the project's depreciation expense minus both the project's taxes and capital spending.
B)   minus both the project's change in net working capital and capital spending.
C)   minus the project's change in net working capital plus all of the depreciation expenses.
D)   plus the project's depreciation expenses minus the project's taxes.
E)   minus the project's taxes.F) A) and E)
G) B) and E)

Question 7

You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $249,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. Ignore bonus depreciation. The equipment can be sold at the end of the project for $115,000. You will also need $18,000 in net working capital for the duration of the project. The fixed costs will be $37,000 a year and the variable costs will be $148,000 per park. Your required rate of return is 14 percent and your tax rate is 21 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100)

Accepted Answer

A)   $212,500
B)   $208,400
C)   $214,300
D)   $214,100
E)   $208,200F) B) and E)
G) A) and E)

Question 8

Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2?

Accepted Answer

A)   $216,000/(1 + .2 + .32) 
B)   $216,000(1 − .2 − .32) 
C)   $216,000(.20 + .32) 
D)   [$216,000(1 − .20) ](1 − .32) 
E)   $216,000[(1 + .20) (1 + .32) ]F) A) and E)
G) All of the above

Question 9

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Accepted Answer

A)   Underlying value principle
B)   Stand-alone principle
C)   Equivalent cost principle
D)   Salvage principle
E)   Fundamental principleF) A) and D)
G) C) and D)

Question 10

Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $98,700. Today, that lot has a market value of $128,900. At the time of the purchase, the company spent $6,500 to level the lot and another $12,000 to install storm drains. The company now wants to build a new facility on the site at an estimated cost of $494,200. What amount should be used as the initial cash flow for this project?

Accepted Answer

A)   −$611,400
B)   −$623,100
C)   −$641,600
D)   −$592,900
E)   −$582,400F) B) and C)
G) A) and C)

Question 11

A proposed three-year project will require $589,000 for fixed assets, $79,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $47,000. The fixed assets will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $67,900. The tax rate is 21 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project?

Accepted Answer

A)   $364,190
B)   $361,000
C)   $370,126
D)   $378,970
E)   $369,770F) A) and B)
G) A) and C)

Question 12

A project has projected sales of $76,400, cash expenses of $42,900, depreciation of $3,730, taxes of $7,200, and an initial cash requirement of $2,200 for working capital. What is the amount of the operating cash flow using the top-down approach?

Accepted Answer

A)   $22,570
B)   $30,030
C)   $28,300
D)   $26,300
E)   $24,570F) B) and C)
G) D) and E)

Question 13

Decreasing which one of the following will increase the acceptability of a project?

Accepted Answer

A)   Sunk costs
B)   Salvage value
C)   Depreciation tax shield
D)   Equivalent annual cost
E)   Accounts payable requirementF) A) and B)
G) A) and D)

Question 14

You own some equipment that you purchased four years ago at a cost of $287,000. The equipment is five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for Years 1 to 6, respectively. You are considering selling the equipment today for $105,000. Which one of the following statements is correct if your tax rate is 24 percent and you claim no bonus depreciation?

Accepted Answer

A)   The tax due on the sale is $13,357.76.
B)   The book value today is $49,406.40.
C)   The accumulated depreciation to date is $270,468.80.
D)   The taxable amount on the sale is $54,593.60.
E)   The aftertax salvage value is $91,702.46F) All of the above
G) A) and E)

Question 15

High Breeze is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project?

Accepted Answer

A)   −$530,600
B)   −$158,720
C)   −$553,000
D)   −$585,600
E)   −$559,600F) A) and B)
G) C) and E)

Question 16

Jefferson & Sons is evaluating a project that will increase annual sales by $198,600 and annual cash costs by $94,500. The project will initially require $187,000 in fixed assets that will be depreciated straight-line to a zero book value over the four-year life of the project. No bonus depreciation will be taken. The applicable tax rate is 22 percent. What is the operating cash flow for this project?

Accepted Answer

A)   $97,851
B)   $89,920
C)   $91,483
D)   $86,480
E)   $46,620F) B) and C)
G) A) and E)

Question 17

Overland purchased $387,950 of fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for Years 1 to 4, respectively. What is the amount of the depreciation expense in Year 3 assuming no bonus depreciation is taken?

Accepted Answer

A)   $28,747.10
B)   $42,399.29
C)   $57,455.40
D)   $59,929.11
E)   $12,766.59F) A) and C)
G) A) and B)

Question 18

Which one of the following costs was incurred in the past and cannot be recouped?

Accepted Answer

A)   Incremental 
B)   Side
C)   Sunk 
D)   Opportunity 
E)   Erosion F) A) and E)
G) C) and D)

Question 19

Which one of the following is an example of a sunk cost?

Accepted Answer

A)   $1,500 of lost sales because an item was out of stock
B)   $1,200 paid to repair a machine last year
C)   $20,000 project that must be forfeited if another project is accepted
D)   $4,500 reduction in current shoe sales if a store commences selling sandals
E)   $1,800 increase in comic book sales if a store ceases selling puzzlesF) All of the above
G) A) and C)

Question 20

The operating cash flow of a cost-cutting project:

Accepted Answer

A)   is equal to the depreciation tax shield.
B)   is equal to zero because there is no incremental sales.
C)   can only be analyzed by projecting the sales and costs for a firm's entire operations.
D)   includes any changes that occur in the current accounts.
E)   can be positive even though there are no sales.F) C) and E)
G) B) and E)

Exam 10: Making Capital Investment Decisions

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Which one of the following is an example of a sunk cost?

Correct Answer
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Correct Answer
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Which one of the following costs was incurred in the past and cannot be recouped?

Correct Answer
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Hot and Cold has annual sales of $847,000, annual depreciation of $47,000, and net working capital of $43,000. The tax rate is 21 percent and the profit margin is 7.3 percent. The firm has no interest expense. What is the amount of the operating cash flow?

Correct Answer
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The operating cash flow of a cost-cutting project:

Correct Answer
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The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Correct Answer
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A project's cash flow is equal to the project's operating cash flow:

Correct Answer
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Correct Answer
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GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Correct Answer
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Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Correct Answer
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Webster's has sales of $798,000 and a profit margin of 6.8 percent. The annual depreciation expense is $82,600. What is the amount of the operating cash flow if the company has no long-term debt?

Correct Answer
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A project has projected sales of $76,400, cash expenses of $42,900, depreciation of $3,730, taxes of $7,200, and an initial cash requirement of $2,200 for working capital. What is the amount of the operating cash flow using the top-down approach?

Correct Answer
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Correct Answer
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Decreasing which one of the following will increase the acceptability of a project?

Correct Answer
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Correct Answer
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Overland purchased $387,950 of fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for Years 1 to 4, respectively. What is the amount of the depreciation expense in Year 3 assuming no bonus depreciation is taken?

Correct Answer
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Exam 10: Making Capital Investment Decisions

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following is an example of a sunk cost?

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Correct AnswerverifiedShow Answer

Which one of the following costs was incurred in the past and cannot be recouped?

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Hot and Cold has annual sales of $847,000, annual depreciation of $47,000, and net working capital of $43,000. The tax rate is 21 percent and the profit margin is 7.3 percent. The firm has no interest expense. What is the amount of the operating cash flow?

Correct AnswerverifiedShow Answer

The operating cash flow of a cost-cutting project:

Correct AnswerverifiedShow Answer

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Correct AnswerverifiedShow Answer

A project's cash flow is equal to the project's operating cash flow:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Correct AnswerverifiedShow Answer

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Correct AnswerverifiedShow Answer

Webster's has sales of $798,000 and a profit margin of 6.8 percent. The annual depreciation expense is $82,600. What is the amount of the operating cash flow if the company has no long-term debt?

Correct AnswerverifiedShow Answer

A project has projected sales of $76,400, cash expenses of $42,900, depreciation of $3,730, taxes of $7,200, and an initial cash requirement of $2,200 for working capital. What is the amount of the operating cash flow using the top-down approach?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Decreasing which one of the following will increase the acceptability of a project?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Overland purchased $387,950 of fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for Years 1 to 4, respectively. What is the amount of the depreciation expense in Year 3 assuming no bonus depreciation is taken?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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